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January 8, 2013

FINRA Updates Guidance on Communications With Public

More On Legal & Compliance

from The Advisor's Professional Library

Recent Changes in the Regulatory Landscape
2011 marked a major shift in the regulatory environment, as the SEC adopted rules for implementing the Dodd-Frank Act. Many changes to Investment Advisers Act were authorized by Title IV of the Dodd-Frank Act.

Advertising Advisor Services and Credentials
Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.

FINRA released in early January an updated set of questions and answers to its Regulatory Notice 12-29, which announced SEC approval of FINRA’s new Rule 2210 on communications with the public.

The new communications rule becomes effective on Feb. 4, and FINRA announced Tuesday that it plans to hold a free 60-minute webinar on Jan. 29 to discuss the rule. The webinar will specifically address the new supervision standards for seminars and other public appearances, the new filing requirement for structured products and how social media fits in under the new rules.

To provide additional guidance on compliancewith the new rules, FINRA has published a set of questions and answers onthe Advertising Regulation page on the FINRA website. The Q&A addresses issues concerning internal communications, transitional filing issues, new member firms, retail structured products, recommendations and public appearances.

For instance, FINRA offers this further guidance on retail structured products:

Q: New FINRA Rule 2210(c)(3)(E) requires a firm to file within 10 business days of first use or publication retail communications concerning any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency (registered structured products). What types of products does this filing requirement cover?

A: While it is not possible to list all registered structured products, examples include exchange-traded notes that are not registered under the Investment Company Act but are registered under the Securities Act, registered reverse convertibles, registered structured notes, registered principal protection notes, and any other registered security that includes embedded derivative-like features. See Regulatory Notice 12-03 for some examples of registered structured products.

The purpose of this filing requirement is to have firms file with FINRA retail communications about structured products that are registered under the Securities Act. It is not intended to create a duplicative requirement for retail communications that are already subject to filing, such as retail communications concerning mutual funds, closed-end funds, exchange-traded funds that are registered under the Investment Company Act, variable insurance products, direct participation programs or collateralized mortgage obligations.

While this filing requirement applies to retail communications concerning registered structured products, it does not apply to issuer-prepared prospectuses, including issuer-prepared free-writing prospectuses, that are filed with the SEC.

Another question asks how the new rule changes the filing requirements for new member firms.

FINRA provides this response:

Under NASD Rule 2210, a firm that has not previously filed advertisements with FINRA (or with a registered securities exchange having comparable standards) must file its initial advertisement with FINRA at least 10 business days prior to use and must continue to file its advertisements at least 10 business days prior to use for a period of one year.

FINRA Rule 2210 revises this standard in two respects. First, a new firm's one-year filing period commences on the date reflected in the Central Registration Depository (CRD) system as the date that FINRA membership became effective, rather than on the date the firm files its first advertisement with FINRA. However, the filing requirement only applies to a subset of communications that fall within the definition of "retail communication": those that would have been considered "advertisements" under NASD Rule 2210, such as print or public media advertisements or generally accessible websites. Second, if the retail communication is a free writing prospectus that has been filed with the SEC pursuant to Securities Act Rule 433(d)(1)(ii), the firm may file the retail communication within 10 business days of first use rather than 10 business days prior to first use.